I am a psychologist turned investment advisor to high-net-worth investors like you at Conservative Wealth Management LLC. My passion is applying academic research to investing in a way that's simple enough for even me to understand. This has led to writing ten books (nearly all with with my pal, economist Ben Stein) on topics ranging from alternatives to dividends to retirement and low-risk strategies. There are a couple of books on politics in there as well, from a right-of-center point of view.

Attention Boomers: Welcome To The 'Reverse Inheritance' And An ETF Yielding 9%

A chum is nearing retirement. He has always spent about as much as he earned, and so only has accumulated a token portfolio outside of his major asset, his dreamhouse. He was counting on an a sizeable inheritance from his Dad to bankroll his golden years. Unfortunately, his Pop made some foolish investments, and then required years of round-the-clock nursing care, and this has burned through the rest of Pop’s assets. Now the kids are going to have to chip in to keep him intubated. You’ve heard of the reverse mortgage; allow me to present the reverse inheritance. Boomers will be getting a lot of these.

As our discussion progressed, I suddenly realized that this was an entire generation talking. There are literally tens of millions of people in our country in my friend’s predicament: no significant savings outside of their homes, and not much coming down the chimney in the way of an inheritance, either. Then, on the debit side of the ledger, thirty or forty years of retirement ahoy.

What my friend and all of them are going to have to do, whether they realize it or not, is monetize every tangible asset they have –specifically, their houses — and turn them into an income stream. We are a generation desperate for income.

I cover a lot of investing-for-yield ideas in The Affluent Investor, but I am always in the crow’s nest on the lookout for something new. Most turn out to be gimmicks booby-trapped with high fees and designed for sale to hicks. However, I think I have sighted a good one. You be the judge.

Options for income

Ben Stein and I have long been lukewarm about using option strategies to generate income. The usual idea is to buy a S&P 500 index fund and then sell call options against it. Call options give the buyer the right, for a price (the premium), to buy the underlying index at a preset price in the event the market goes up significantly. Most of the time, the money from the call option premiums are gravy. If the market goes up a lot, though, the holder of the option will whisk it away.

We never loved this idea because it delivers nearly all the downside of the market but decapitates the upside. The extra income the strategy generates is not enough to compensate for this potential loss. People who spend the income stream may not be aware that the underlying portfolio is not going to keep pace with the market in the long run. Both The Wall Street Journal and Barron’s have posted articles critical of this strategy within the past week.

Sometimes these funds go further: they take part of the money from the call premiums and use it to buy put options on the index at the same time. These put options give them the right to sell the market to someone else in the event of a big downturn. When you do both — sell calls and buy puts — the net effect is to place a collar around your returns.

We like this idea even less well. I was able to simulate the performance of one of these funds to a remarkable degree just by buying a S&P 500 index fund and holding a sidecar of Treasury bills. The T-bills did a splendid job limiting the upside and downside of the total investment without resorting to expensive management fees and side-trading for the options. It left me feeling skeptical about all such enterprises.

To put the blame where it is due, I first heard about HVPW from Rob Sterner at Rangeley Capital, the hedge fund started by my genius nephew Chris DeMuth, Jr. (I am not here to promote Rangeley even though I am a limited partner; as a matter of Forbes.com policy I cannot recommend it.)

Rob says, “I’m afraid calling it “High Volatility” is box-office poison from a marketing perspective.” Let’s look under the hood to see what’s going on here.

Getting skewed

HVPW is a “put-write” fund. This is the inverse of the “covered call” funds described above. The generic approach sells put options against the S&P 500 index and then holds Treasuries to collateralize them. A fund like this will underperform the stock market during good months, but in the event of a severe market decline the fund has to buy the market right at the worst possible time. In other words, it has “negative skew.”

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